Category Archives: USA

Japan and the Economics of the American Empire

Excerpt from Chalmers Johnson‘s excellent Blowback, written 18 months before september 11th, and stated that some middle easter blowback (CIA euphemism for anti-US results of US foreign policy and covert operations) was a near certainty. Blowback also predicted much of the 2008 economic collapse, though post 2008 adjustments have simply prolonged the problem rather than confronting the cause.

During the Cold War the Soviet Union lost any number of friends and potential allies by forever hectoring them about Marxism and the stages of economic growth they would have to go through in order ever to hope to live like Russians. Such Marxist rigidity clearly benefited the American side in the superpower face-off of that era. Ideological arrogance turned many countries, like Tanzania and Egypt, against their Soviet economic advisers, and overbearing Soviet behavior contributed heavily to the Sino-Soviet dispute. Unfortunately, in the post–Cold War era it is the United States that is exhibiting a capitalist version of such heavy-handedness and arrogance.

 

Ideology—that is, the doctrines, opinions, or way of thinking of an individual, a class, a nation, or an empire—is as tricky a substance to use in international conflicts as poison gas. It, too, has a tendency to blow back onto the party releasing it. During the late 1950s, in the depths of the Cold War, many Americans began to suspect that the Soviet Union was actually a third-rate economy; but it still had the world’s most alluring ideology, a body of thought capable of attracting more people in the Third World than the “possessive individualism” (to use the philosopher C. B. Macpherson’s term) espoused by the United States. Soviet intellectual appeals were built around the ideas of Karl Marx—indubitably a man of the West and properly buried in Highgate Cemetery, London—which attracted even the most chauvinistic people on earth, the Chinese. Marxism-Leninism, as espoused by the Soviet Union, provided explanations for the inequities of colonialism, a model of economic development based on the achievements of Russia under Stalin, and the promise of world peace when all nations had passed beyond imperialism, which was the “final stage of capitalism.”

 

Part of what gave Soviet ideology such power to convince whole peoples in the Third World was the way it assimilated and invoked the single most uncontested ideology of our century, that of science. It claimed to rest not on the hopes of idealistic reformers but on the logic of “scientific socialism.” The Soviets insisted that they were acting in accordance with laws of human development discovered by their patron saints, Marx and Lenin. By contrast, the ideology of the “free world” looked at best like a rationalization of the privileges enjoyed by Americans because of their exceptional geography and history.

 

Not surprisingly, American leaders came to feel that somehow they had to match the ideological claims of communism in what they saw as a great global battle for the souls of earth’s contested majority. Nowhere did this need seem more acutely necessary than in East Asia, where Communist regimes had come to power in China, North Korea, and Vietnam despite the fact that Marx’s analysis of class conflict in industrializing societies bore only the faintest relation to the actual conditions in any of these countries. At the time, communism was also an active competitor in every other country of the region. Asians were attracted to it precisely because it claimed to be based on science—the ingredient that seemed to undergird the industrial and military might of their European, American, and Japanese colonizers—and because the example of the Soviet Union held out the hope of a solution that might someday be within their own revolutionary grasp.

 

The American response, never expressly articulated but based on the total mobilization of the American people for the Cold War by President John F. Kennedy and other leaders, was twofold. First, we would do everything in our considerable power to turn Japan into a capitalist alternative to mainland China, a model and a showcase of what Asians might expect if they threw in their lot with the Americans instead of the Communists. Second, academic economics as taught in most American universities was subtly transformed into a fighting ideology of the “West.” From each of these transformations would come fateful consequences for the American empire after its competition with the Soviet Union ended. Because most Americans never understood either policy to be a strategy for pursuing the Cold War, they took both Japan’s achievements and the wealth of the West to be evidence of an ineluctable destiny that made the United States a singularly appropriate model for the rest of the world. Any doubts raised about these propositions were seen as undermining the pretensions of the American empire. Thus, what began as tactical responses to temporary, often illusory or misleadingly interpreted Soviet “advantages” ended up as ideological articles of faith for the “sole superpower” of the post–Cold War world.

 

From approximately 1950 to 1975, the United States treated Japan as a beloved ward, indulging its every economic need and proudly patronizing it as a star capitalist pupil. The United States sponsored Japan’s entry into many international institutions, like the United Nations and the Organization for Economic Cooperation and Development, well before a post–World War II global consensus in favor of Japan had developed. It also transferred crucial technologies to the Japanese on virtually concessionary terms and opened its markets to Japanese products while tolerating Japan’s protection of its own domestic market. It even supported the Japanese side in all claims by individual American firms that they had been damaged by Japanese competitors. In addition, the United States allowed Japan to retain an artificially undervalued currency in order to give its exports a price advantage for well over a decade longer than it did any of the rebuilt European economies.

 

We proclaimed Japan a democracy and a model of what free markets could achieve while simultaneously helping to rig both its economic and political systems. We used the CIA to finance the ruling party and engaged in all manner of dirty tricks to divide and discredit domestic socialists.1 In this process there was much self-deception. For far too long America’s leading officials insisted that Japan could never be an economic competitor of the United States’. President Eisenhower’s secretary of state John Foster Dulles was, for example, convinced that while the Japanese might be able to sell shirts, pajamas, “and perhaps cocktail napkins” to the American market, little else was possible for them.2 Americans did not wake up to Japan’s competitive challenge until their steel, consumer electronics, robotics, automotive, camera, and semiconductor industries were virtually extinct or fighting for their lives.

 

After the “security treaty riots” of 1960, when a Japanese mass movement tried to prevent the signing of a treaty that would perpetuate the basing of American troops in Japan and Okinawa, the United States moved its campaign to portray Japan as a model democracy into high gear. It appointed as ambassador the well-known Harvard historian of Japan Edwin O. Reischauer, who was married to a Japanese woman from a distinguished political family. His job was to repair the damage to the image of Japanese-American amity caused by the 1960 riots, which to many Asians appeared to be a Japanese equivalent to the Budapest uprising of 1956. Reischauer was to “reopen a dialogue” with the alienated Japanese left while shoring up the conservative Liberal Democratic Party, its aging rightists from prewar and wartime governments now screened from public view while it emphasized economic growth over democracy.

 

Perhaps Reischauer’s most influential step was to endorse in his own extensive writings and speeches of the time a movement among American academic specialists to rewrite the history of modern Japan as a case study of successful “modernization.” So-called modernization theory flourished in the United States during the 1960s just as the Japanese economy “took off” (to use that famous term of the modernization theorists), achieving double-digit growth rates. This new approach to Japan traced the country’s course of development from the Meiji Restoration of 1868, which was Japan’s debut as a unified nation rather than a collection of feudal states. It contrasted Japan’s achievement of great-power status with the dependency and susceptibility to colonialism of the rest of Asia, particularly China. It stressed how the initial authoritarianism of the Meiji oligarchs evolved into a toleration of political parties during the 1920s, producing at least the possibility of parliamentary democracy. The theory drew attention to how the “liberal” 1920s, although ultimately destroyed by reaction and militarism after 1931, provided precedents for reform that many Japanese leaders seized upon when genuine democratization got under way during the American occupation.

 

Japan emerged from this stirring tale of political and economic development as an exemplary nation, the only country in Asia that avoided being colonized. The fact that it did so by joining the Western colonialists in victimizing the other countries of Asia was underemphasized in such accounts. Japan’s kuroi tanima, or “dark valley,” from 1931 to 1945, in which it warred with China and the United States, was explained away as due to a unique concatenation of international factors—the Great Depression, the closing of European and American colonies to Japanese exports, Japan’s fear of bolshevism, and American isolationism. What actually went on in the “dark valley,” from the rape of Nanking to the Bataan Death March, was incidental to the tale of economic growth and political consolidation and best forgotten, since Japan’s aggression was now understood to be but a temporary sidestep on a long march toward modernization. The emperor of Japan, who had reigned since 1926 and presided over much military aggression and brutality, emerged as a simple marine biologist and pacifist who had opposed the war from the beginning and had actually brought it to an end in 1945 through his own decisive action. It was said that he was a man of few words in view of the fact that from the end of the war to his death in 1989 he was never again allowed to utter many in public.

 

The American public, like its policy elites never very well informed about Japan to begin with, bought this rosy picture of that country as the chief bulwark against communism in Asia. John Dower and a few American academic specialists argued that modernization theory was incomplete and that Japan’s militarism had domestic roots every bit as deep as its commitment to modernity, but they were easily ignored.3 Japan was now entrenched in American consciousness as a full-fledged democratic ally with a system rooted in free-market capitalism and certain eventually to “converge” with the United States as a liberal, consumer-based state.

 

To be sure, there were occasional “misunderstandings” as one nation’s capitalists sought competitive advantage over the other. In dealing with such “unfortunate” developments, the task of diplomacy and the mission of the American embassy in Tokyo became not to champion American interests but to ameliorate the conflict itself, usually to Japan’s advantage. Nothing seriously wrong could come of such policies, it was argued, because, as modernization theory taught, the two societies were on the same developmental path toward common economic ends.

 

The second aspect of the ideological challenge to the Soviet Union was the development and propagation of an American economic ideology that might counter the promise of Marxism—what today we call “neoclassical economics,” which has gained an intellectual status in American economic activities and governmental affairs similar to that of Marxism-Leninism in the former USSR. Needless to say, Soviet citizens never understood Marxism-Leninism as an ideology until after it had collapsed, just as Americans like to think (or pretend) that their economics is a branch of science, not a fighting doctrine to defend and advance their interests against those of others. They may consider most economists to be untrustworthy witch doctors, but they regard the tenets of a laissez-faire economy—with its cutthroat competition, casino stock exchange, massive inequalities of wealth, and a minor, regulatory role for government—as self-evident truths.

 

Until the late 1950s, academic economics remained one of the social sciences, like anthropology, sociology, and political science—a non-experimental, often speculative investigation into the ways individuals, families, firms, markets, industries, and national economies behaved under different conditions and influences. It was concerned with full employment, price stability, growth, public finance, labor relations, and similar socioeconomic subjects. After it became the chief ideological counterweight to Marxism-Leninism during the Cold War, its practitioners tried to extract it from the social sciences and re-create it as a hard science.

 

Its propositions were now expressed less in words than in simultaneous equations, the old ideas of Adam Smith reappearing as fully mathematized axioms, increasingly divorced from empirical research. Its data were said to be “stylized facts,” and economists set out to demonstrate through deductive reasoning expressed in mathematical formulas that resources could be allocated efficiently only through an unfettered market. By now all these terms (“resources,” “efficiency,” “markets”) had been transformed into abstractions, not unlike the abstract formulations (“the proletariat,” “the bourgeoisie,” “class conflict”) of its Soviet opponents. English-speaking economics became such a “hard science” that in 1969 the central bank of Sweden started giving Nobel Prizes to its adepts, virtually all of them American academicians. This ensured that virtually all aspiring economists would in the future try to do so-called theoretical economics—that is, the algebraic modeling of markets—rather than old-fashioned empirical and inductive research into real-world economies.

 

Economics split from the social sciences and took up a new position somewhere close to mathematics. Economists were now endlessly called upon by governmental bodies to testify that the American economy was unmatchable, even if it sometimes behaved badly because of overspending liberals, pork-barrel politics, or greedy monopolists. Alternatives to it were understood to be either converging with it or destined to fail. Economics no longer studied the economy; it spoke ex cathedra about what was orthodox and what was heresy. Meanwhile, empirical research on economic phenomena migrated to business schools, commercial think tanks, and the other social sciences.

 

Unquestionably, after the first two decades of the Cold War, in a purely dichotomous choice between an economy based on Marxism-Leninism and one based on free-market capitalism—as exemplified by the economies of the Soviet Union and the United States—most people around the world would have chosen the free market. But in East Asia, at the height of the Sino-Soviet dispute and the American war in Vietnam, neither ideology was working out according to either superpower’s script. The Chinese were discrediting forever whatever attractiveness might have remained in the forced-draft economic achievements of the Soviet model. Through bungling, megalomania, and deep ideological confusion about what Marxism and the Soviet experience taught, the Chinese Communist Party managed to kill thirty million of its own citizens and then, in a paroxysm of mutual blame, came close to destroying its unmatchable cultural legacy in the so-called Cultural Revolution. Today this period is recognized—even in China—as a monumental disaster, but at the time many Americans, from idealistic leftist students to presidents and other political leaders, failing to understand what was happening, retained a sentimental attraction to Mao Zedong and Zhou Enlai, the mismanagers of the Chinese revolution.

 

The truly surprising development in East Asia, however, was that America’s “non-Communist” satellites, protectorates, and dependencies were starting to get rich and to compete with their superpower benefactor. All of this was camouflaged by the Cold War itself, so that the enrichment of East Asia occurred almost surreptitiously. The year-in, year-out record-breaking growth rates of such previously poor places as Japan, South Korea, and Taiwan were not precisely what American elites had expected, but they were explained away as nothing more than confirmations—even overconfirmations—of officially espoused free-market ideology and so were greeted with parental pride.

 

If the capitalist economies of East Asia were starting to perform better than the United States itself, this anomaly was usually attributed to mysterious Japanese or Asian cultural or even spiritual factors or to complacency on the part of American managers and workers. By the time the Western world awoke to what had actually happened, economic growth in East Asia was self-sustaining and unstoppable by external actions (although many Asians thought this was exactly what the United States was attempting when its policies toward the area led to the meltdown of 1997). The enrichment of East Asia under the cover of the Cold War was surely the most important, least analyzed development in world politics during the second half of the twentieth century. It remains to this day intellectually indigestible in the United States.

 

The fundamental problem is not simply that in the Cold War era Japan attained a $5 trillion economy—although that alone was an unexpected competitive challenge to American economic preeminence—but how it did so. It had found a third way between the socialist displacement of the market advocated by Soviet theorists and an uncritical reliance on the market advocated by American theorists. The Japanese had invented a different kind of capitalism—something no defender of the American empire could accept. It was therefore assumed either that the Japanese were cheating (and all that we needed to compete successfully against them was a “level playing field”) or that they must be headed for a collapse similar to the one that had overtaken the USSR.

 

In turning neo-classical economic theory into a fighting ideology, American ideologues encountered one element of capitalist thought that they could not express in abstract, seemingly “scientific” mathematical terms. This was the set of institutions through which competitive market relationships actually produce their benefits. Institutions are the concrete, more-or-less enduring relationships through which people work, save, invest, and earn a living—such things as stock exchanges, banks, labor unions, corporations, safety nets, families, inheritance rules, and tax systems. This is the realm of the legal, political, and social order, where many considerations that govern the economy other than efficiency contend for primacy. For economic theorists institutions are “black boxes,” entities that receive and transmit economic stimuli but are themselves unaffected by economic theory.

 

In attempting to forge a fully numerical, scientific-looking model of the capitalist economy for purposes of the Cold War, Western ideologues simply assumed that the institutions of modern capitalism must be those that existed in the United States in the late Eisenhower era. This meant that savings were typically moved from the saver to industry through a capital market (such as the New York Stock Exchange) rather than, for example, through the banking system. They assumed that industrial-labor conflicts were settled by interminable strikes, and not by, for example, offering some workers career job security; and they assumed that the whole purpose of an economy was to serve the short-term interests of consumers, instead of some overarching goal such as the wealth and power of the nation as a whole.

 

These American assumptions were almost identical to the Soviet assumption that the institutions of “socialism” must be those that existed in the USSR during, say, the Khrushchev era. Neither side ever produced an ideological model to sell to others that could be divorced from their own country. Because of this inability to express the institutions of either socialism or capitalism in some culturally neutral—or at least more varied—way, it is understandable that many observers simply reduced the claims of Marxist-Leninist ideology to the USSR and those of free-market capitalism to the United States.

 

In finding a third way, Japan’s postwar economic “miracle” reinvented not economic theory but the institutions of modern capitalism so that they would produce utterly different outcomes from those imagined in the American model. Given Japan’s history of catch-up industrialization, its overarching need to avoid the victimization and colonialism to which every other area of East Asia had succumbed, its virtual dearth of raw materials, its dependence on manufacturing and international trade to sustain its large population, and its overwhelming defeat in World War II, it could not ever have become a clone of the United States. Its postwar planners and technocrats instead organized a capitalist economy intended to serve the interests of producers over consumers. They forced Japan’s citizens to save by providing little in the way of a safety net; they encouraged labor harmony regardless of what it did to individual rights; and they built industries based on the highest possible human input rather than simply on some naturally given comparative advantage, such as cheap labor or proximity to a large market like China’s. Their goal was to enrich Japan, if not necessarily the Japanese themselves. They viewed all economic transactions as strategic: theirs was to be an economy organized for war but now directed toward ostensibly peaceful competition with other countries.

 

Since the 1950s, the United States had seen the entire world in Cold War terms. This meant that Japan was far more important as an anti-Communist ally than as a potential economic competitor. In order to keep U.S. troops and bases in Japan, the Americans provided open access to their market and the government pressured private American firms to relinquish ownership rights to technologies being transferred to Japan. As Japanese trade and industrial bureaucrats took advantage of this deal, trade disputes became inevitable. From the “dollar blouses” that flooded into the United States during the Eisenhower era to the textile disputes of the Kennedy and Nixon administrations, complaints about the costs of “alliance” with Japan became a permanent feature of Washington politics. They also produced a lucrative new field for former government officials turned lobbyists, whom the Japanese hired in increasing numbers to ameliorate or paper over the disputes. Even though Washington remained more or less ignorant of how the government in Tokyo actually worked, the government in Tokyo took a life-or-death interest in Washington’s role in regulating the American economy. Japanese officials also did everything in their power to maintain the artificial separation between trade and defense that the U.S. government had invented and to see that the Pentagon was happy with its facilities.

 

This artificial separation between trade and defense has been a peculiar characteristic of the half-century-long American hegemony over Japan. Official guardians of the Japanese-American Security Treaty and their academic supporters have maintained an impenetrable firewall between what they call, using the Japanese euphemism, “trade friction” and the basing of one hundred thousand American troops in Japan and South Korea. There was no reason why these two aspects of the Japanese-American relationship should been dealt with as if they were separate matters except that, had they not been, the actual nature of the relationship would have been far easier to grasp.

 

Until the 1980s, the United States officially ignored all evidence that this compartmentalization of its massive military establishment and its growing trade deficits with Japan was going to be very costly. From about 1968 on, trade deficits began to rise just as the hollowing out of certain industries that the Japanese government had targeted became more visible. U.S. officials then consulted with their Japanese counterparts about these problems and accepted fig-leaf agreements that offered the pretense of remedies to distressed American businesses and communities. With the exception of President Nixon’s 1971 decision to force an ending to Japan’s artificially undervalued exchange, nothing else of significance was done.

 

During the 1980s, however, pressures for action of some sort markedly increased. The Japanese economy, now a major competitor, was starting to erode the industrial foundations of the United States. Moreover, the Cold War was settling into its final Reaganesque rituals. Despite inflated CIA estimates of Soviet strength, it became increasingly clear to many, even before the rise to power of Mikhail Gorbachev, that the two sides were starting to accommodate each other and that the threat of a superpower war was declining. In this context, a new way of thinking developed about Japan itself and about the nature of America’s relationships with newly rich Asia. Business Week dubbed it “revisionism” and wrote:

 

No less than a fundamental rethinking of Japan is now under way at the highest levels of the U.S. government, business, and academia. The standard rules of the free market, according to the new school, simply won’t work in Japan. . . . Some people call the new thinking “revisionism,” departing as it does from the orthodox view that Japan will eventually become a U.S.-style consumer-driven society.4

 

The Japanese, who had been very proud of their “developmental state” and its guided economy and who readily wrote about it for domestic consumption, suddenly became concerned when American revisionists, myself included, began saying that “leveling the playing field” was not the issue, since the two economies were different in such fundamental ways. It was one thing for Japan and its lobbyists to parry complaints about their country’s closed markets and the numerous barriers it raised against foreign products ranging from automobiles and semiconductors to grapefruit and rice. It was quite another for Americans to claim that they were playing by entirely different rules. Accusations that the “revisionists” were Japan bashers or racists rose quickly to the surface.

 

Meanwhile, a number of Japanese politicians and industrialists added insult to injury by claiming that the trade deficit resulted from the laziness of American workers or resorted to racism by pointing to the racially mixed nature of the workforce while characterizing American minorities as indisciplined and ineducable. In 1989, a prominent Japanese politician, Shintaro Ishihara, and the president of Sony, Akio Morita, cowrote a book, The Japan That Can Say “No,” in which they suggested that their country should not share Japanese-developed technologies that the Americans regarded as of national security significance unless the Americans reined in their critiques. In 1998, Ishihara, angry about an economy that seemed to be heading into decline, wrote a sequel, The Japan That Can Say “No” Again, suggesting a halt in investment in U.S. government securities to teach a lesson to Americans who had pushed Japan to open its economy. These views made him sufficiently popular that in 1999 he was elected mayor of Tokyo.

 

Nonetheless, the American government continued its typical Cold War style of doing business into the early 1990s. In 1988, for example, State Department and Pentagon leaders proposed transferring to Japan the technology of the F-16 fighter aircraft in order to allow the Japanese to build their own fighter, the FS-X. A huge controversy erupted over why the Japanese did not simply buy the F-16 fighters they needed from the manufacturer, thereby helping to balance the trade deficit and keep manufacturing in the United States. One State Department official, Kevin Kearns, who was in Tokyo at the time the FSX deal was negotiated, agreed with the critics and wrote in the Foreign Service Journal, “As long as the Chrysanthemum Club [of pro-Japanese American officials] continues to skew the policy process in our government and paid Japanese lobbyists and academics-for-hire continue to influence disproportionately the treatment of Japan in the public realm, the United States will continue its approach to Japan in the same tired, self-defeating way.”5 Following these remarks, Deputy Secretary of State Lawrence Eagleburger publicly denounced Kearns and in February 1990 forced his resignation from the State Department. The Bush administration then transferred the F-16 technology to Japan.

 

In an equally telling incident in 1990, the Matsushita Electric Company of Japan bought MCA Inc., the giant Hollywood-based entertainment conglomerate, for $7.5 billion, one of the biggest purchases ever of an American company by a foreign firm. This was less than a year after Sony had acquired Columbia Pictures for $3.4 billion and Newsweek had run a cover showing Columbia’s torch-bearing female icon wearing a kimono.6 In addition to by-then-widespread worries about Japanese capital invading the United States, there was the further complication that MCA owned a lucrative concession that serviced visitors to Yosemite National Park. In order to avoid the public relations embarrassment of having a Japanese company own part of a national park, the Department of the Interior suggested that Matsushita donate the concession to the park service. The Japanese, however, did not want to let it go and instead hired an elite corps of Washington lobbyists, lawyers, and public relations specialists to escort their purchase past congressional and government critics.

 

Leading the Matsushita team was former U.S. trade representative Robert Strauss. According to the Washington Post, he was paid $8 million for successfully brokering the deal and seeing to its public relations aspects, including getting the Department of the Interior to back off. When asked by reporters why he was being paid such an enormous fee for a minimal amount of work, Strauss nonchalantly replied, “I don’t work by the hour anymore. I don’t do windows.”7 This remark greatly puzzled the Japanese, although they were pleased enough with what their largesse had bought them. They concluded that Washington was as corrupt as Jakarta or Seoul and that anything could be had if the price was right. Rather than devoting attention to the potential pitfalls of their own brand of capitalism, the Japanese in this instance followed a distinctly American path and convinced themselves that they were invincible, while the United States was in a terminal decline. They therefore marched steadily toward their own decade-long economic downfall.

 

These alarms and diversions were also effective in turning American attention away from the most distinctive trait of Japan’s type of capitalism—namely, the major role given to governmental industrial policy and its role in a capitalist economy. Industrial policy refers to the attempt by the government to nurture particular strategic industries that are thought to be needed by an economy for reasons of national security, export competitiveness, or growth potential.8 As a result, most Americans failed to grasp how crucially Japan’s industrial policy depended on its political and military relationship with the United States and on access to its vast market. Nor did they understand that the Japanese were investing the huge trade profits in American Treasury securities that were, in turn, helping to finance America’s huge debts and making the American financial system critically dependent on Japanese savings. This growing dependency made American officials reluctant to criticize the Japanese in any way. Even when they did so, the Japanese rationalized such criticism as meant only for U.S. domestic consumption.

 

What Americans, including the revisionists, failed to see was that the Japanese economy, still devoted to exporting a vast array of ever more sophisticated and technologically advanced manufactured goods primarily to the American market, was generating an industrial overcapacity that would eventually threaten the health of the world economy. Moreover, as much of Asia began to emulate the Japanese form of capitalism or become offshore manufacturing platforms for Japanese corporations, this overcapacity threatened to reach crisis proportions. The crisis came to a head in 1997 and has been a continuing feature of the international economy ever since.

 

Political developments helped precipitate the crisis. In 1992, the Americans elected Bill Clinton on a slogan of “It’s the economy, stupid,” and in 1993, the Liberal Democratic Party in Japan, no longer needed as a bulwark against communism, simply collapsed of its own corruption and redundancy.

 

The Clinton administration did experiment briefly with policies advocated by the revisionists, including managed trade. The new administration even toyed with convincing the Japanese to join in helping manage Japanese-American trade, but its heart was never in it. The actual work was left to the usual array of Washington lawyers and economists, who had no East Asian knowledge or experience whatsoever, with the easily predictable outcome that the Japanese, much more experienced and better informed than their American adversaries, simply ran circles around them.

 

Using their huge leverage over American debt financing and Clinton’s need for the appearance of domestic economic prosperity in order to be reelected in 1996, the Japanese got the Americans to back down on most trade issues. The administration covered its tracks by claiming that it could not allow economic disputes to interfere with security and military matters. The difficulty was that except for the bellicose statements and deployments of the United States itself, peace was breaking out in East Asia. In 1992, for example, China recognized South Korea; that same year the government of the Philippines asked the U.S. Navy to leave the major base it had long occupied at Subic Bay. Still, the U.S. government claimed to see threats from North Korea and China, and the Japanese went along, doing whatever they could to satisfy the Pentagon.

 

In 1993, the Liberal Democratic Party lost its majority in the Japanese Diet for the first time in thirty-eight years. Increasingly irrelevant to Japan’s need to reinvigorate its economy and assume control over its foreign policy, it was not voted out of office but simply disintegrated. At first, a popular coalition government formed among the many new parties in the Diet. It seemed that a long overdue political realignment might be at hand. As it turned out, the Socialist Party, long feared by the United States because of its advocacy of “neutralism,” was so beguiled to be in office that it ultimately abandoned everything it had ever claimed to stand for and forged a cynical coalition with the LDP to control parliament. In the end, all the LDP’s loss of power revealed was that the party system itself had largely been postwar window dressing. In 1997, the LDP returned to power and resumed its stewardship over Japan’s old Cold War relationship with the United States.

 

At least, though, the rise to power in the 1993-97 interregnum of nonmainstream LDP and opposition party leaders opened up an important debate over how and why the country had become so rich and yet had such an ineffective elected government. Bureaucratic insiders as well as intellectuals and academics began publicly to acknowledge and elaborate on the very points the American revisionists had made. New York Times correspondent James Sterngold reported from Tokyo, “Five years ago, some Western critics were derided by the Japanese establishment as wrong—and probably racist—for declaring that Japanese policy was set by bureaucrats, not politicians, and that Japanese politics was often corrupt. . . . Suddenly, expressions and criticism previously regarded as blasphemous when uttered by ‘revisionists’ and ‘Japan bashers’ are spoken with a surprising matter-of-factness.”9 In the process they opened up whole new perspectives for viewing the interlocking Japanese governmental, social, and economic systems. They affirmed that a corps of unelected elite bureaucrats actually governed the country under a façade of democracy. They laid out the ways in which, working within a Cold War framework and guided by their government, the major corporations had invested in productive capacity many times greater than domestic demand could possibly absorb, thereby becoming totally dependent on continued sales to the American and Asian markets. They detailed the methods of the cartels, of restrictive licensing practices, of the underdeveloped system of judicial review, and of myriad other “nontariff barriers” to trade that kept American and European corporate penetration of the domestic market to a minimum.

 

One impetus for such new, self-critical attitudes could be found in the changed economic atmosphere. Following a binge of big-ticket investments at the end of the 1980s and a bubble of real estate speculation that accompanied newfound wealth, the economy began to falter. After eight years of stagnation, in 1998 it finally plunged into real recession. In an ironic twist, American ideologists used these developments to argue as always that American free-market capitalism was the globe’s one and only path to success. However, they now incorporated revisionist analyses without acknowledgment into their critiques of the Japanese economy. For example, the Wall Street Journal’s Paul Gigot had long maintained that Japan’s economy operated just like the U.S. model. “Japan’s miracle, like Britain’s and America’s before it,” he wrote in 1986, “was largely the product of creativity and enterprise by individuals and their businesses.”10 A decade later, in a column entitled “The Great Japan Debate Is Over: Guess Who Won?,” he could be found deriding Japan’s “model of bureaucratic-led economic growth,” as distinguished from “American-style capitalism.” His new point: the revisionists may have been right about how Japan worked but they were wrong to think it was a success. To the extent that the Japanese economy might ever stage a comeback, Gigot argued in a fashion typical of his colleagues, it would have to do business “in a framework that more resembles the American model.”11 Put another way, these economic ideologues found convincing proof in Japan’s economic fate that a hegemonic America would continue to dictate the rules of international commerce into the distant future, even if that hegemony were disguised with catchphrases like “globalization.”

 

As the Cold War receded into history, the United States, rather than dissolving its Cold War arrangements, insisted on strengthening them as part of a renewed commitment to global hegemony. Japan was supposed to remain a satellite of the United States, whether anyone dared use that term or not. Meanwhile, annual American trade deficits with Japan soared. American manufacturing continued to be hollowed out, while a vast manufacturing overcapacity was generated in Japan and its Southeast Asian subsidiaries. Capital transfers from Japan to the United States generated huge gains for financiers and produced an illusion of prosperity in the United States, but in 1997, it all started to unravel. The most severe economic crisis since the Great Depression hit the East Asian economies and began to spread around the world.


Each year approximately ten thousand American troops descend on Thailand for a joint military exercise called Cobra Gold. The military part of these visits is largely make-work for the American and Thai staffs, but the troops love Cobra Gold because of the sex. According to the newspaper Pacific Stars and Stripes, some three thousand prostitutes wait for the sailors and marines at the South Pattaya waterfront, close to Utapao air base. An equal number of young Thai girls from the country-side, many of whom have been raped and then impressed into the “sex industry,” are available downtown in Bangkok’s Patpang district. They are virtually all infected with AIDS, but the condom-equipped American forces seem not to worry. At the time of the 1997 war games, just before the economic crisis broke, sex with a Thai prostitute cost around fifteen hundred Thai baht, or sixty dollars at its then pegged rate of twenty-five baht to one U.S. dollar. By the time of the next year’s Cobra Gold the price had been more than halved.1 This is just one of many market benefits Americans gained through their rollback operation against the “Asian model” of capitalism.

The global economic crisis that began in Thailand in July 1997 had two causes. First, the built-in contradictions of the American satellite system in East Asia had heightened to such a degree that the system itself unexpectedly began to splinter and threatened to blow apart. Second, the United States, relieved of the prudence imposed on it by the Cold War, when any American misstep was chalked up as a Soviet gain, launched a campaign to force the rest of the world to adopt its form of capitalism. This effort went under the rubric of “globalization.” As these two complex undertakings—perpetuating Cold War structures after they had lost their purpose and trying to “globalize” countries that thought they had invented a different kind of capitalism—played themselves out around the world, they threatened a worldwide collapse of demand and a new depression. Whatever happens, the crisis probably signaled the beginning of the end of the American empire and a shift to a tripolar world in which the United States, Europe, and East Asia simultaneously share power and compete for it.

During the Cold War, the Communists routinely charged that the United States used the Marshall Plan for rebuilding wartorn Europe and subsequent economic aid programs to advance the interests of American companies and to keep the Third World dependent on the First. According to the Communist theory of economic colonialism, capitalist states enforce an inherently discriminatory division of labor on less developed countries by selling them manufactured goods and buying from them only raw materials, an extremely profitable arrangement for capitalists in advanced countries and one that certainly keeps underdeveloped countries underdeveloped. This is why revolutionary movements in underdeveloped countries want either to overthrow the capitalist order or to industrialize their economies as fast as possible.

Such economic colonialism has long existed in many aspects of America’s relations with Latin America. During the Cold War, the United States wrapped this system of dependency in the rhetoric of anticommunism, labeling elected leaders Communists if they seemed to endanger American corporate interests, as in Guatemala in 1954, and ordering the CIA to overthrow them. Campaigns against the influence of Fidel Castro, for instance, often proved of great usefulness to American companies south of the border. But this pattern of relationships did not cause the global economic crisis of the late 1990s.

The fundamental structural cause was the way the United States for more than forty years won and retained the loyalty of its East Asian satellites. These non-Communist countries accepted the American deal as offered and worked hard at “export-led growth,” primarily to the American market. If the Japanese led this movement, behind them were three ranks of followers: first, the “newly industrialized countries” of South Korea, Taiwan, Hong Kong, and Singapore; then, the late developers of Southeast Asia, Malaysia, Indonesia, Thailand, and the Philippines; and finally, China, at present the world’s fastest-growing economy. The Japanese found this so-called flying-geese pattern appealing. They were flattered to be the lead goose and the inspiration for those that followed. The leaders of each of these countries assumed that their economic destination—Los Angeles (and from there the rest of the American market)—was a permanent feature of the international environment; and so long as the Cold War existed, it was as permanent as anything ever is in interstate relations.

Over time, however, this pattern produced gross overinvestment and excess capacity in East Asia, the world’s largest trade deficits in the United States, and a lack of even an approximation of supply-and-demand equilibrium across the Pacific. Contrary to Communist analyses of how neocolonialism should work, these terms proved surprisingly costly to the imperial power. They cost American jobs, destroyed manufacturing industries, and blunted the hopes of minorities and women trying to escape from poverty.

Judith Stein, a professor of history at the City College of New York, has detailed how the de facto U.S. industrial policy of sacrificing American workers to pay for its empire devastated African-American households in Birmingham, Alabama, and Pittsburgh, Pennsylvania. This is, of course, but another form of blowback. She writes, “At the outset of the Cold War, reconstructing or creating steel industries abroad was a keystone of U.S. strategic policy, and encouraging steel imports became a tool for maintaining vital alliances. The nation’s leaders by and large ignored the resulting conflict between Cold War and domestic goals. Reminiscing about elite thinking in that era, former Federal Reserve Board chairman Paul A. Volcker recalled that ‘the strength and prosperity of the American economy was too evident to engender concern about the costs.’ ”2 Moreover, American economic ideologues always dominated what debate there was, couching the problem in terms of protectionism versus internationalism, never in terms of prosperity for whites versus poverty for blacks. The true costs to the United States should be measured in terms of crime statistics, ruined inner cities, and drug addiction, as well as trade deficits.

U.S. officials did finally start to negotiate more or less seriously with the Japanese and the other “miracle economies” to open their markets to American goods. But the attempt always collided with the security relationship. In order to level the economic playing field, the United States would have had to level the security playing field as well, and this it remains unwilling to do.

In East Asia, to create industries that could export to the American market, design the right products, and achieve competitive prices and levels of quality, governmental industrial policies became the norm. Japan was the regional pioneer in creating model collaborative relationships between government and industry. In part, it drew on its history as one of the world’s most successful late industrializers and on its wartime production system, in which the government and the huge zaibatsu, or corporate combines, had worked together to produce the weapons that Japan needed. After the onset of the Cold War, the Americans did very little to prevent the Japanese from re-creating the combines (now called keiretsu) and the legal structure that supported them, largely because occupation officials either failed to recognize what was happening or were blind to its implications.

To base a capitalist economy mainly on export sales rather than domestic demand, however, ultimately subverts the function of the unfettered world market to reconcile and bring into balance supply and demand. Instead of producing what the people of a particular economy can actually use, East Asian export regimes thrived on foreign demand artificially engineered by an imperialist power. In East Asia during the Cold War, the strategy worked so long as the American economy remained overwhelmingly larger than the economies of its dependencies and so long as only Japan and perhaps one or two smaller countries pursued this strategy. But by the 1980s the Japanese economy had become twice the size of both Germanies. Anything it did affected not just the American but the global economy. Moreover, virtually everyone else in East Asia (and potentially every underdeveloped country on earth) had some knowledge of how to create such a miracle economy and many were trying to duplicate Japanese-style high-speed growth. An overcapacity for products oriented to the American market (or products needed to further expand export-oriented economies) became overwhelming. There were too many factories turning out athletic shoes, automobiles, television sets, semiconductors, petrochemicals, steel, and ships for too few buyers. The current global demand for automobiles, for example, seems to have peaked at around 50 million vehicles at a moment when capacity has already grown to 70 million. To make matters worse, as a result of the global economic crisis, auto sales in Southeast Asia fell from 1.3 million in 1997 to 450,000 in 1998.

This is not to say that all the barefoot peoples of the world who might like to wear athletic shoes or all the relatively poor people who might someday be able to afford a television set or an automobile are satisfied. But for now they are too poor to be customers. The current overcapacity in East Asia has created intense competition among American and European multinational corporations. Their answer has been to lower costs by moving as much of their manufacturing as possible to places where skilled workers are paid very little. These poorly paid workers in places like Vietnam, Indonesia, and China cannot consume what they produce, while middle- and lower-class consumers back in the United States and Europe cannot buy much more either because their markets are saturated or their incomes are stagnant or falling. The underlying danger is a structural collapse of demand leading to recession and ultimately to something like the Great Depression. As the economic journalist William Greider has put it in his book One World, Ready or Not, “Shipping high-wage jobs to low-wage economies has obvious, immediate economic benefits. But, roughly speaking, it also replaces high-wage consumers with low-wage ones. That exchange is debilitating for the entire system.”3 The only answer is to create new demand by paying poor people more for their work. But the political authorities capable of enacting and enforcing rules to enlarge demand could not do so even if they wanted to because “globalization” has placed the matter beyond their control.

A crisis of oversupply was inevitable given the passage of time and the unwillingness of imperial America to reform its system of satellites. Even in the late 1990s, the American economy continued to serve as the consumer of last resort for the enormous manufacturing capacity of all of East Asia, although doing so produced trade deficits that cumulatively transferred trillions of dollars from the United States to Asia. This caused an actual decline in the household incomes of the bottom tenth of American families, whose real incomes fell by 13 percent between 1973 and 1995. It was only in 1997 that a weak link snapped—not, ironically, in trade, but finance—and threatened to bring the system down.

The financial systems of all the high-growth East Asian economies were based on encouraging exceptionally high domestic household savings as the main source of capital for industrial growth. Such savings were achieved by discouraging consumption through the high domestic pricing of consumer goods (which, of course, also led to charges of “dumping” of normally priced goods when they were sent abroad). To save in such a context was a patriotic act, but it was also a matter of survival in societies that provided little in the way of a social safety net for times of emergencies, and in which housing often had to be bought outright or in which interest payments on mortgages was not treated favorably as a tax deduction.

East Asian governments collected these savings in banks affiliated with industrial combines or in government savings institutions such as post offices. In organizing their economies, they had chosen not to rely primarily on stock exchanges to raise the capital their export industries needed. Instead they found it much more effective to guide the investment of the savings in these banks to the industries the governments wanted to develop. In East Asia, ostensibly private banks thus became partners in business enterprises and industrial groups, not independent creditors concerned first and foremost with the profitability of a company or the success of a loan. These banks in effect followed government orders and felt secure so long as they did so.

Superficially, corporations in most East Asian countries looked like their American or European equivalents, but in this case appearances were indeed deceptive. As the American corporate raider T. Boone Pickens discovered when he tried to buy a small Japanese company that made auto headlights, a significant block of shares was held by the Toyota Motor Company. The firm he wanted to acquire was part of the automaker’s keiretsu, or conglomerate of cooperating firms and banks. Although Pickens acquired what in the United States would have been a controlling interest in the company, Toyota blocked his takeover and prevented him from naming his own directors and corporate officers. The fact that Pickens was able to buy the shares at all was a fluke in Japanese corporate governance, the result of a single disgruntled stockholder. Until very recently Japanese corporations were “owned” entirely by one another in elaborate cross-share-holding deals designed to keep people like Pickens out and to keep the enterprise working for the country rather than for the profits of shareholders. The sale of shares was not a way to raise capital, and the people who held them were uninterested in the risks or profits that the company’s operations entailed.

This was actually a brilliant system. Oxfam, the British development and relief agency, maintains that the Cold War East Asian economies achieved “the fastest reduction in poverty for the greatest number of people in history.”4 But the stability of any East Asian economy depended on its keeping its financial system closed—that is, under national control and supervision. Once opened up to the rest of the world, the financial structures of the East Asian developmental states were extremely vulnerable to attack by foreign capital and international financial speculators. The industrial policy system produced corporations in which the burden of debt was five times greater than the value of the shareholders’ investments, whereas these so-called debt-to-equity ratios for U.S. firms are less than one to one. East Asian corporations operating with such large burdens of debt were normally indifferent to the price of their equity shares. Instead, they serviced these debts at their banks with income from foreign sales. When they were unable to repay their loans, the banks themselves very quickly veered toward bankruptcy. The whole system depended on continuous growth of revenue from export sales.

East Asian bankers are no stupider or more corrupt than those elsewhere. It is just that the industrial policies of the systems within which they operate put the profitability of a loan very near the bottom of the criteria they use for making an investment decision. Instead, these bankers focus on enlarging productive capacity, achieving larger market shares, accumulating assets, and having large balance sheets. It is true that from a purely Western perspective, they should not have offered many of the loans they made. To us it seems insane to ignore commercial criteria such as profitability. But for a Korean banker, it was more important to support an affiliated company that was building cars for the U.S. market than to question whether the company was making prudent investment decisions. That was part of the logic of being a banker in a satellite country within America’s hegemonic order in East Asia.

Then, without warning, that order changed. Perhaps the first important blow to the East Asian model of capitalism came in 1971, when President Nixon abolished the Bretton Woods system of fixed exchange rates, created by the United Nations Monetary and Financial Conference in the summer of 1944 at Bretton Woods, New Hampshire. The treaties that resulted from Bretton Woods were the most important efforts of the victorious Allies of World War II to create a better global financial system than the one that existed in the 1930s. The Allies intended to prevent a recurrence of the protectionism and competitive devaluations of national currencies that had deepened the Great Depression and fueled the rise of Nazism. To do these things, the Bretton Woods conference established a system of fixed exchange rates among the world’s currencies. It also created the International Monetary Fund, to help countries whose economic conditions forced them to alter the value of their currencies, and the World Bank, to help finance postwar rebuilding. The value of every currency was tied to the value of the U.S. dollar, which was in turn backed by the U.S. government’s guarantee that it would convert dollars into gold on demand.

Nixon decided to end the Bretton Woods system because the Vietnam War had imposed such excessive expenditures on the United States that it was hemorrhaging money. He concluded that the government could no longer afford to exchange its currency for a fixed value of gold. A more effective answer would have been to end the Vietnam War and balance the federal budget. Instead, what actually occurred was that the dollar and other currencies were allowed to “float”—that is, to be converted into other currencies at whatever rate the market determined.

The historian, business executive, and novelist John Ralston Saul described Nixon’s action as “perhaps the single most destructive act of the postwar world. The West was returned to the monetary barbarism and instability of the 19th century.”5 Floating exchange rates introduced a major element of instability into the international trading system. They stimulated the growth of so-called finance capitalism—which refers to making money from trading stocks, bonds, currencies, and other forms of securities as well as lending money to companies, governments, and consumers rather than manufacturing products and selling them at prices determined by unfettered markets. Finance capitalism, as its name implies, means making money by manipulating money, not trying to achieve a balance between the producers and consumers of goods. On the contrary, finance capitalism aggravates the problems of equilibrium within and among capitalist economies in order to profit from the discrepancies. During the nineteenth century the appearance, and then dominance, of finance capitalism was widely recognized as a defect of improperly regulated capitalist systems. Theorists from Adam Smith to John Hobson observed that capitalists do not really like being capitalists. They would much rather be monopolists, rentiers, inside traders, or usurers or in some other way achieve an unfair advantage that might allow them to profit more easily from the mental and physical work of others. Smith and Hobson both believed that finance capitalism produced the pathologies of the global economy they called mercantilism and imperialism: that is, true economic exploitation of others rather than mutually beneficial exchanges among economic actors.

Opponents of capitalism, such as Marxists, viewed such problems as inescapable and the ultimate reason capitalist systems must sooner or later implode. Supporters of capitalism, such as Smith and Hobson, thought that its problems could be solved by imposing social controls on the monetary system, as did the Bretton Woods agreement. As they saw it, lack of such controls led to the maldistribution of purchasing power. Too few rich people and too many poor people resulted in an insufficient demand for goods and services. The “excess capital” thus generated had to find some place to go. In the maturing capitalist countries of the nineteenth century, financiers pressured their governments to create colonies in which they could invest and obtain profits of a sort no longer available to them at home. The nineteenth-century theorists believed this was the root cause of imperialism and that its specific antidote was the use of state power to raise the ability of the domestic public to consume. After the United States ended the Bretton Woods system, these kinds of problems once again returned to haunt the world.

In the 1980s, when Japanese trade with the United States began seriously to damage the American economy, the leaders of both countries chose to deal with the problem by manipulating exchange rates. This could be done by having the central banks of each country work in concert buying and selling dollars and yen. In a meeting of finance ministers at the Plaza Hotel in New York City in 1985, the United States and Japan agreed in the Plaza Accord to force down the value of the dollar and force up the value of the yen, thereby making American products cheaper on international markets and Japanese goods more expensive. The low (that is, inexpensive) dollar lasted for a decade.

The Plaza Accord was intended to ameliorate the United States’ huge trade deficits with Japan, but altering exchange rates affects only prices, and price competitiveness and price advantages were not the cause of the deficits. The accord was based on good classroom economic theory, but it ignored the realities of how the Japanese economy was actually organized and its dependence on sales to the American market. The accord was, as a result, the root cause of the major catastrophes that befell East Asia’s economies over the succeeding fifteen years.

Once the high yen–low dollar regime was in place, the U.S. government assumed that the trade imbalance would correct itself. The United States did nothing to end Japan’s barriers against imports and still permitted Japan to export into its market anything and everything it could sell there. Japan reacted to the high yen by putting its industrial policy system into high gear in order to lower costs so it could continue its export-led growth, even at a disadvantageously high exchange rate. The Japanese Ministry of Finance also lowered domestic interest rates to make capital virtually free and encouraged industrial groups to invest more vigorously than they had ever done before. The result was fantastic industrial overcapacity and a “bubble economy,” in which the prices of such things as real estate lost any relationship to underlying values. Business leaders proudly announced on American television that a square meter of the Ginza was worth more than all of Seattle. Ultimately, huge debts accumulated and the Japanese banks were stuck with at least $600 billion in “nonperforming” loans that threatened to bankrupt the entire banking system.

By 1995, the contradictions were starting to come to a head. Japan still had a huge surplus of savings, which it exported to the United States by investing in U.S. Treasury bonds, thereby helping fund America’s debts and keep its domestic interest rates low. And yet Japan itself was simultaneously facing the possibility of the collapse of several of its bankrupt banks. Financial leaders said to the Americans that they needed relief from the high yen in order to increase Japan’s exports. They hoped to solve their problems in the traditional way, via more export-led growth. Eisuke Sakakibara, then Japan’s vice minister for international affairs in the Ministry of Finance, readily acknowledges that he intervened with Washington to lower the value of the yen and admits to his “inadvertent role in precipitating one of the 20th century’s greatest economic crises.”6 The United States went along with this; facing reelection in 1996, Bill Clinton certainly did not want Japanese capital called home to prop up Japanese banks at that moment. As a result, between 1995 and 1997 the U.S. Treasury and the Bank of Japan engineered a “reverse Plaza Accord”—which led to a 60 percent fall of the yen against the dollar.

However, in the wake of the Plaza Accord, many newly developing Southeast Asian economies had by then “pegged” their currencies to the low dollar, establishing official rates at which businesses and countries around the world could exchange Southeast Asian currencies for dollars. So long as the dollar remained cheap, this gave them a price advantage over competitors, including Japan, and made the region very attractive to foreign investors because of its rapidly expanding exports. It also encouraged reckless lending by domestic banks, since pegged exchange rates seemed to protect them from the unpredictability of currency fluctuations. During the early 1990s, all of the East Asian countries other than Japan grew at explosive rates. Then the “reverse Plaza Accord” brought disaster. Suddenly, their exports became far more expensive than Japan’s. Export growth in second-tier countries like South Korea, Thailand, Indonesia, Malaysia, and the Philippines went from 30 percent a year in early 1995 to zero by mid-1996.7

Certain developments in the advanced industrial democracies only compounded these problems. Some of their capitalists had spent the post–Plaza Accord decade developing “financial instruments” that enabled them to bet on whether global currencies would rise or fall. They had also accumulated huge pools of capital, partly because aging populations led to the exceptional growth of pension funds, which had to be invested somewhere. Mutual funds within the United States alone grew from about $1 trillion in the early 1980s to $4.5 trillion by the mid-1990s. These massive pools of capital could have catastrophic effects on the value of a foreign currency if transferred in and then suddenly out of a target country. Fast-developing computer and telecommunications technologies radically lowered transaction costs while increasing the speed and precision with which finance capitalists could transfer money and manipulate currencies on a global scale. The managers who controlled these funds began to encourage investment anywhere on earth under the rubric of “globalization,” an esoteric term for what in the nineteenth century was simply called imperialism. They argued that excess capital should be allowed to flow freely in and out of any and all countries. Some economists argued that the free flow of capital was the same thing as the free flow of goods, despite mountainous evidence to the contrary.

Capital flows to developing nations in Asia and Latin America jumped from about $50 billion a year before the end of the Cold War to $300 billion a year by the mid-1990s. From 1992 to 1996, Indonesia, Malaysia, Thailand, and the Philippines experienced money and credit growth rates of 25 percent to 30 percent a year. During this same period South Korea, Thailand, and Indonesia invested nearly 40 percent of their gross domestic product in new productive capacity as well as in hotels and office buildings; the comparable figure for European nations was only 20 percent and even less for the United States. In 1996, Asia was the destination for half of all global foreign investment, European and Japanese as well as American. On the American side, by 1997 Citibank held about $22 billion in local currency loans in East Asia, about $20 billion in securities, and $8 billion in dollar loans; Morgan Bank had $19 billion in Asian securities and $6 billion in dollar loans; and Chase had $4 billion in local currency loans, $15 billion in Asian securities, and $6 billion in dollar loans.8

Although they did not speak out at the time, a number of famous financiers and economists have since pointed out the dangers of what is called “hot money” or “gypsy capital.” George Soros, one of the world’s richest financiers and head of a large “hedge fund” located in the Netherlands Antilles, asserted that “financial markets, far from tending toward equilibrium, are inherently unstable,” and he warned against the folly of continuing down the path of deregulating the financial services industry.9 Jagdish Bhagwati, one of free trade’s most passionate supporters and a former adviser to the director-general of the General Agreement on Tariffs and Trade, argued that the idea of free trade had been “hijacked by the proponents of capital mobility.” He claimed that there was a new “Wall Street–Treasury complex,” comparable to the military-industrial complex, which contributes little to the global economy but profits enormously from pretending that it does. The East Asian economies did not really need hot money from abroad, since in most cases they saved enough themselves to finance their own growth. Bhagwati has also pointed out that an unregulated financial system can with relative ease become divorced from the productive system it is supposed to serve and so be unnaturally predisposed to “panics and manias.”10

There was as well a less financial ingredient in the disaster-in-the-making. Without particularly thinking about it or sponsoring any public debate on the subject, the U.S. government built its future global policies on the main military elements of its Cold War policies. It expanded NATO to include the former Soviet satellites of the Czech Republic, Hungary, and Poland; it reinforced its East Asian alliances; and it committed itself to ensuring access to Persian Gulf oil for itself and its allies. The Gulf War of 1991 was the first demonstration of this commitment. Eschewing a “peace dividend,” which it might have directed toward its own industrial and social infrastructure, the United States also kept its Cold War–sized defense budgets in the $270 billion range while seeking to reorient its military focus from the possibility of war with a more or less equivalent enemy to imperial policing chores everywhere on earth.

With hegemony established on military terms and the American public more or less unaware of what its government was doing, government officials, economic theorists, and members of the Wall Street–Treasury complex launched an astonishingly ambitious, even megalomaniacal attempt to make the rest of the world adopt American economic institutions and norms. One could argue that the project reflected the last great expression of eighteenth-century Enlightenment rationalism, as idealistic and utopian as the paradise of pure communism that Marx envisioned; or one could conclude that having defeated the Fascists and the Communists, the United States now sought to defeat its last remaining rivals for global dominance: the nations of East Asia that had used the conditions of the Cold War to enrich themselves. In the latter view, U.S. interests lay not in globalization but in bringing increasingly self-confident competitors to their knees.

In any event, buoyed by what the apologist for America Francis Fukuyama has called the “end of history”—the belief that with the end of the Cold War all alternatives to the American economic system had been discredited—American leaders became hubristic. Although there is no evidence that Washington hatched a conspiracy to extend the scope of its global hegemony, a sense of moral superiority on the part of some and of opportunism on the part of others more than sufficed to create a similar effect.

Their efforts came in two strategic phases. From about 1992 to 1997, the United States led an ideological campaign to open up the economies of the world to free trade and the free flow of capital across national borders. Concretely this meant attempting to curb governmental influence, particularly any supervisory role over commerce in all “free-market democracies.” Where this effort was successful (notably in South Korea), it had the effect of softening up the former developmental states, leaving them significantly more defenseless in the international marketplace.

Beginning in July 1997, the United States then brought the massive weight of unconstrained global capital to bear on them. Whether the U.S. government did this by inadvertence or design is at present impossible to say. But at least no one can claim that America’s leadership did not know about the size and strength of the hedge funds located in offshore tax havens and about the incredible profits they were making from speculative attacks on vulnerable currencies. In 1994, for example, David W. Mullins, former Harvard Business School professor and vice chairman of the Federal Reserve Board, went from being a deputy of Reserve Board chairman Alan Greenspan to a position as a director of Long-Term Capital Management (LTCM), a huge hedge fund with its headquarters in Greenwich, Connecticut, but its money safely stashed in the Cayman Islands, beyond the reach of tax authorities. In 1998, after the conditions it helped bring about had almost bankrupted the fund, the New York Federal Reserve Bank arranged a $3.65 billion cash bailout to save the company—as good an example of pure “crony capitalism” as any ever attributed to the high-growth economies of East Asia. In fact, when the bailout came to light, a number of Asian publications cynically recalled how the New York Times had editorialized only months earlier that in Asia “collusive practices were not only tolerated, they were encouraged” and that “the United States needs to reiterate the importance of full transparency by companies and financial institutions.”11 After the LTCM bailout, Martin Mayer, one of the most respected writers on the American financial system, observed that “the Fed [Federal Reserve Board] for all its talk of ‘transparency’ has made the fastest growing area of banking totally opaque, even to the supervisors themselves.”12

In order to make it intellectually respectable for the smaller Asian economies to swallow all the money the United States, Japan, and other advanced countries were offering them, the U.S. government threw its weight behind the Asia-Pacific Economic Cooperation forum (APEC), an organization the Australians had launched at a meeting of trade ministers in Canberra in November 1989. The forum did not, however, take off until November 1993, when President Clinton decided to attend an APEC meeting in Seattle and turned it into an Asia-Pacific summit of leaders from all the major East Asian nations. The Seattle meeting also produced APEC’s first “Economic Vision Statement”: “The progressive development of a community of Asia-Pacific economies with free and open trade and investment [italics added].” Under American leadership, APEC became the leading organization promoting globalization in East Asia. At annual meetings in different Pacific Rim countries, it insistently propagandized that the Asian “tiger economies” open up to global market forces, in accordance with the most advanced (American) theorizing about capitalist economies and in order to not be left behind as mere developmental states.

The November 1994 APEC meeting in Bogor, Indonesia, committed the participants to free trade and investment in the Pacific by 2010 for developed countries and by 2020 for developing countries, such as China and Indonesia. In 1995, at Osaka, APEC members agreed to unilaterally open their economies rather than attempt to negotiate a treaty like the North American Free Trade Agreement, which would have generated too much resistance in many of the member nations. Nothing much happened at Manila in 1996—except for a visit by the leaders to the old U.S. naval base at Subic Bay, now cleaned up of its prostitutes and turned into a free-trade and development zone. At Vancouver in November 1997, with the Asian financial crisis already under way, the United States pushed for the rapid removal of tariffs and nontariff barriers to trade in fifteen different sectors of economic activity. At Kuala Lumpur in November 1998, APEC finally came unglued. The prime minister of Malaysia, Mahathir Mohamad, had only a few months earlier reimposed capital controls over his economy to insulate it from gypsy capital, for which Vice President Al Gore openly denounced him, encouraging the people of Malaysia to overthrow him. The meeting ended in rancor, with Japan taking the lead in scuttling any further market-opening schemes for the time being. Its Ministry of Foreign Affairs declared that the United States was possessed by an “evil spirit” and accused it of endangering the region’s fragile economic condition by pushing market-opening measures down the throats of countries too weak to open their borders further.13 Malaysia and the United States did not even bother to attend the 1999 APEC meeting of trade ministers in Auckland, New Zealand.

The shock that brought this edifice crashing to the ground started in the summer of 1997, when some foreign financiers discovered that they had lent huge sums to companies in East Asia with unimaginably large debts and, by Western standards, very low levels of shareholder investment. They feared that other lenders, particularly the hedge funds, would make or had already made the same discovery. They knew that if all of them started to reduce their risks, the aggregate effect would be to force local governments to de-peg their currencies from the dollar and devalue them. Since this would raise the loan burdens of even the most expertly managed companies, they too would have to rush to buy dollars before the price went out of sight, thereby helping to drive the value of any domestic currency even lower.

The countries that had followed recent American economic advice most closely were most seriously devastated. They had opened up their economies to unrestricted capital flows without understanding the need to regulate the exposure of their own banks and firms. They did not ensure that borrowers in their countries invested the money they acquired from abroad in projects that would pay adequate returns or that actually constituted collateral for the loans. The foreign economists who advised them did not stress the institutional and legal structures needed to operate in the world of American-style laissez faire. No one warned them that if they raised their interest rates in order to slow inflation, foreign money would pour into their countries, attracted by high returns, whereas if they lowered interest rates in order to prevent a recession, it would provoke an immediate flight of foreign capital. They did not know that unrestricted capital flows had put them in an impossible position. What took place in East Asia was a clash between two forms of capitalism: the American system, disciplined by the need to produce profits, and the Asian form, disciplined by the need to produce growth through export sales.

The International Monetary Fund entered this picture and turned a financial panic into a crisis of the underlying economic systems. As already mentioned, the Bretton Woods conference of 1944 had created the IMF to service the system of fixed exchange rates that lasted until the “Nixon shocks” of 1971. It survived its loss of mission in 1971 to become, in the economist Robert Kuttner’s words, “the premier instrument of deflation, as well as the most powerful unaccountable institution in the world.”14 The IMF is essentially a covert arm of the U.S. Treasury, yet beyond congressional oversight because it is formally an international organization. Its voting rules ensure that it is dominated by the United States and its allies. India and China have fewer votes in the IMF, for example, than the Netherlands. As the prominent Harvard economist Jeffrey Sachs puts its, “Not unlike the days when the British Empire placed senior officials directly into the Egyptian and Ottoman [and also the Chinese] financial ministries, the IMF is insinuated into the inner sanctums of nearly 75 developing country governments around the world—countries with a combined population of some 1.4 billion.”15

In 1997, the IMF roared into a panic-stricken Asia, promising to supply $17 billion to Bangkok, $40 billion to Jakarta, and $57 billion to Seoul. In return, however, it demanded the imposition of austerity budgets and high interest rates, as well as fire sales of debt-ridden local businesses to foreign bargain hunters. It claimed that these measures would restore economic health to the “Asian tigers” and also turn them into “open” Anglo-American-type capitalist economies. At an earlier meeting at Manila in November 1997 called to deal with the crisis, Japan and Taiwan had offered to put up $100 billion to help their fellow Asians, but the U.S. Treasury’s assistant secretary, Lawrence Summers, denounced the idea as a threat to the monopoly of the IMF over international financial crises, and it was killed. He did not want Japan taking the lead, because Japan would not have imposed the IMF’s conditions on the Asian recipients and that was as important to the U.S. government as restoring them to economic health.16

In Indonesia, when the government ended its dollar peg and let the currency float, the rupiah fell from about 2,300 to 3,000 to the dollar but then stabilized. At that point, with almost no empirical knowledge of Indonesia itself, the IMF ordered the closure of several banks in a system that has no deposit insurance. This elicited runs on deposits at all other banks. The wealthy Chinese community began to move its money out of Indonesia to Singapore and beyond, and the country was politically destabilized, leading ultimately to the overthrow of President Suharto. All Indonesian companies with dollar liabilities rushed to sell rupiahs and buy dollars. Equities instantly lost 55 percent of their value and the currency, 60 percent. The rupiah ended up trading at 15,000 to one U.S. dollar. David Hale, chief economist of the Zurich Insurance Group, wrote at the time, “It is difficult, if not impossible, to find examples of real exchange rate depreciations comparable to the one which has overtaken the rupiah since mid-1997.” He suggested that a proper comparison might be with the hyperinflation that hit the German mark in 1923.17

By the time the IMF was finished with Indonesia, over a thousand shopkeepers were dead (most of them Chinese), 20 percent of the population was unemployed, and a hundred million people—half the population—were living on less than one dollar a day. William Pfaff characterized the IMF’s actions as “an episode in a reckless attempt to remake the world economy, with destructive cultural and social consequences that could prove as momentous as those of 19th-century colonialism.”18 Only Japan, China, and Taiwan escaped the IMF juggernaut in East Asia. Japan kept aloof even when the Americans publicly rebuked it for failing to absorb more exports from the stricken countries, for the Japanese knew that the Americans would not actually do anything as long as the marines were still comfortably housed in Okinawa. China remained largely untouched because its currency is not freely convertible and it had paid no attention to APEC calls for deregulation of capital flows. And Taiwan survived because it had been slow in removing its financial barriers. It also maintains a relatively low ratio of investment to gross domestic product, is shifting further toward a service economy whose capital needs are less, and has maintained export diversity—unlike, for example, Korea’s overconcentration in products such as semiconductors destined for the American market. Foreign holdings of Taiwanese currency are negligible because its peculiar political status makes it unattractive to the hedge funds. Thus, it has been able to offer some of its own huge foreign currency holdings to help bail out countries in Southeast Asia.

After the big investors had pulled their money out of East Asia and left the area in deep recession, they turned to Russia. They calculated that there was little or no risk in buying Russian state bonds paying 12 percent interest because the Western world would not let a former superpower armed with nuclear weapons default. But the situation was further gone in Russia than these investors imagined, and so, in August 1998, the Russians defaulted on the interest payments (they still owe foreign investors perhaps $200 billion). If Russia does not repay these loans, it will be the largest default in history. These developments so scared the finance capitalists that they started pulling their money in from all over the world, threatening even well-run economies that had implemented all the economists’ nostrums on how to get rich like the North Americans. The Brazilian economy was so destabilized that in mid-November 1998 the IMF had to put together a $42 billion “precautionary package” to shore it up. Needless to say, the IMF has also helped plunge millions of poor Brazilians deeper into poverty. In order to meet the IMF’s austerity requirements, the Brazilian government even had to cancel a $250 million pilot project to save the Amazon rain forest. The result was that other countries withdrew their matching funds for the Amazon, and the degradation of an area that contributes 20 percent of the globe’s fresh-water supply resumed.19

In speeches in Russia and East Asia during the second half of 1998, President Clinton warned the peoples of these areas not to “backslide” and urged them to open their nations even further to American-style laissez-faire capitalism. But he had lost his audience. By now his listeners understood that the cause of their misery could not also be its cure. Many remembered that the Great Depression started as a financial panic then made worse by deflationary policies similar to those prescribed by the IMF in 1997 and 1998 for East Asia, Russia, and Brazil. The result in the early 1930s was a general collapse of purchasing power. That has not happened so far this time, largely because the United States went on a consumption binge and provided virtually all growth in demand for the excess output of the world. Can American “shop till we drop” be sustained indefinitely? No one knows.

The economic crisis at the end of the century had its origins in an American project to open up and make over the economies of its satellites and dependencies in East Asia. Its purpose was both to diminish them as competitors and to assert the primacy of the United States as the globe’s hegemonic power. Superficially it can be said to have succeeded. The globalization campaign significantly reduced the economic power and capitalist independence of at least some of the United States’ “tiger” competitors—even if, as with Russia and Brazil, the crisis could not be kept within the bounds of East Asia. This was, from a rather narrow point of view, a major American imperial success.

Despite such immediate results, however, the campaign against Asian-style capitalism (and the possibility that America’s satellite states in the area might gain independent political clout as well) was ill-founded and included serious blowback consequences. The United States failed to acknowledge that East Asian success had depended to a considerable extent on preferential, Cold War–based exports to the American market. By cloaking its campaign in the rhetoric of market opening and deregulation instead of the need to reform outdated Cold War arrangements, the United States both destroyed the credibility of its economic ideology and betrayed its Cold War supporters. The impoverishment and humiliation of huge populations from Indonesia to South Korea was itself blowback enough, even if the blowback for the time being spared ordinary Americans. But if and when the stricken economies recover, they will almost certainly start to seek leadership elsewhere than from the United States. At a bare minimum, they will try to protect themselves from ever again being smothered by the American embrace. In short, by refusing to reform its Cold War structures and instead insisting that other peoples emulate the American way, the United States gave itself an unnecessary, possibly terminal case of imperial overstretch. Instead of forestalling global instability, it helped make such instability inevitable.

The triumphalist rhetoric of American leaders basking in their economy’s “stellar performance” has also alarmed foreigners. When Alan Greenspan asserted to Congress that the crisis meant the world was moving toward “the Western form of free market capitalism,” almost no one thought that was either true, possible, or desirable. Economics has not displaced culture and history, regardless of the self-evaluation of the economics profession. Many leaders in East Asia know that globalization and the crisis that followed actually produced only pain for their people, with almost no discernible gains.20 Globalization seems to boil down to the spread of poverty to every country except the United States.

Clearly on the defensive, Richard N. Haass and Robert E. Litan, directors respectively of foreign policy and of economic studies at the Brookings Institution in Washington, lamented, “In some quarters [globalization] is seen as having caused the rapid flows of investment that moved in and out of countries as investor sentiment changed and were behind the Mexican [1995] and Asian financial crises.” But to them this would be a wrong conclusion. To accept it would be to “abandon America’s commitment to the spread of markets and democracy around the world at precisely the moment these ideas are ascendant.”21 But whether such ideas are actually ascendant is, thanks to the crisis, now in doubt, and such doubts are generating more blowback. The duties of “lone superpower” produced military overstretch; globalization led to economic overstretch; and both are contributing to an endemic crisis of blowback.

 

A Time for Change

45 years ago, Ronald Regan gave a speech in support of Barry Goldwater’s 1964 presidential campaign.

And this idea that government is beholden to the people, that it has no other source of power except the sovereign people, is still the newest and the most unique idea in all the long history of man’s relation to man.

This is the issue of this election: whether we believe in our capacity for self-government or whether we abandon the American revolution and confess that a little intellectual elite in a far-distant capitol can plan our lives for us better than we can plan them ourselves.

See Complete Transcript and corresponding audio recording.

Regan was a great actor and a great story teller. He understood that we’ve all got a bias. We tend to ignore information we disagree with, and only listen to what we agree with.

China’s Guilded Age

In 1873, Mark Twain wrote a book satirizing greed and political corruption in post-Civil War America. Instead of calling the book “Golden Age” the less worthy “Gilded Age” was chosen since it represents only a thin layer of gold coated over a base metal. Shortly after the publication of the book, the word “Gilded Age” because synonymous with graft, materialsim and corruption in public life.

Back in 1994, The Atlantic’s Yin Huangxiao came back to China after 10 years in the USA and wrote “China’s Gilded Age“.

A distant cousin who was a high school teacher until 1986 told me modestly that he had made “a little money” by opening a factory that produces bristle brushes for export to America. He drove me to his new summer house in his new Mercedes-Benz 500SEL, one of his three luxury cars. “This is China’s Gilded Age,” a former colleague of mine commented sarcastically. “These Chinese Carnegies and Rockefellers are more successful than their American counterparts — they made more money within a shorter time.”

More recently, in 2007, David Baskin from CBC news wrote that “China’s Gilded Age of Capitalism“.

It is true that China is still governed by the Communist Party, but I have never been in a more capitalistic environment in my life. Ruthless competition is taken for granted; that economic success should be rewarded with wealth is a given; and that upward mobility is possible for those who are smart and hard working is widely believed – the Chinese equivalent of the American dream.

Baskin does write that:

… and that upward mobility is possible for those who are smart and hard working is widely believed – the Chinese equivalent of the American dream.

This last comment doesn’t seem to accurately represent local folks. The local sentiment seems to be that if you are well-connected, then you’ll be fine. However, there isn’t much hope for the average person to be successful. The key difference between the “gilded age” in China now, and the “gilded age” in America 150 years ago, is that Carnegie, Rockefeller and Vanderbilt were all born poor, and managed to work their way up. In China, the sentiment seems to be the strength of your connection to the government determines how much you can earn.

Carry Trade: USD -> China Yuan -> Commodities

The Yen carry trade is over for now, but there’s a new carry trade in town. For those (like me) not terribly familiar with a carry trade, it’s:

Strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate.

Basically, it’s a type of arbitrage where you borrow one asset, and use it to buy another asset assuming that exchange rates WILL NOT CHANGE. When the Bank of Japan set interest rates near 0%, speculators would borrow Yen, trade them for dollars, and then buy dollar denominated assets. The new carry trade is: USD -> RMB -> Commodities.

2009 US federal budget deficit will be $1.75 TRILLION or more.
Not even Bank of China can lend this money, it has to be borrowed.

US dollar bear leads to commodities bull.
People and nations will hoard physical goods to preserve wealth, hence generate demands higher than immediate needs and higher than available supplies.
China is on a big natural resources shopping spree around the world lately, in order to divest its huge foreign currency reserves.

Both events are occurring as people have noticed: Capital is escaping American soil; and China is on a global shopping spree of raw materials.
But people who notice these two things explain it as simply market behavior driven by speculative forces.
They fail to see a more direct, conscious and deliberate reason behind what’s going on, because no one noticed one quiet fact…

That is because for the past one year, trading between USD and CNY is equivalent to exchange one dollar into four quarters, nothing is gained or lost.

[From China, Shipping and the Great Commodity Carry Trade — Seeking Alpha]

But the interesting part is that: As the flood of US dollars flows in, China merely cranks up its own money printing press to print more RMB Yuan to exchange for the US dollars. It then uses some of the dollars to buy US Treasury bonds and prop up the value of the dollar, maintaining a constant USD/Yuan exchange rate. But China’s real goal is not to support the dollar in long term, but to buy time to allow it to divest the huge dollar assets it is holding, in exchange of physical assets: natural resources, raw commodities, foreign mining companies and other physical assets. It costs China nothing to print more Yuans to buy more US dollars and then use the dollars to buy up the whole world.

There are a few conditions that are important to point out and make changing the current status quo (exchange rate) very difficult in the next 12-36 months.

  • Speculators are dumping USD because of financial policy that is not helping to preserve wealth, but those dollars could be used to buy assets anywhere – so why in China?
  • Speculators are dumping dollars and buying CYN due to the long term positive fundamentals in the Chinese economy (large inexpensive labor force, good infrastructure, large trade surpluses)
  • 4 years ago, exchange rates were 8.3:1, for the last 12 months it’s been 6.84:1 (that’s a 17% rise)
  • This 17% rise is partially responsible for the closure of many export oriented businesses here in China — many were already struggling to survive before softening demand in western markets destroyed them.
  • The population in China Mainland is not nearly as productive or as well educated as the populations in Taiwan or Hong Kong, where wages are approximately 2x higher but trade barriers (import tariffs) are lower/non existent.
  • China Mainland Gov’t has raised Export Rebates (to manufacturers) 7 times in 2009 — making the official policy clear – the current export oriented growth is to be salvaged and preserved for the foreseeable future (rather than moving to fill domestic demand)

There are also very practical considerations though. If you own raw materials all over the planet, you must have a way to maintain peaceful seas to ensure delivery of those materials.

Basically, the US economy and the CYN economy are locked together for the foreseeable future – a pair of codependents, but the relationship has the impact of long term strengthening the CYN at the expense of the USD, migrating intellectual property, skilled labor, entrepreneurs, and assets from the US to China. The breakup will be rough, but when the dysfunctional couple is finally ready for a divorce, China is walking away with much more than 50%.

American Ambassador to China: Jon Huntsman, Jr.

Jon Meade Huntsman, Jr. (born March 26, 1960 in Palo Alto, California) is the governor of the state of Utah, having first won the office in 2004. His first term as the 16th governor of Utah began on January 3, 2005. He was re-elected, with running-mate Gary R. Herbert, on November 4, 2008, with over 77% of the vote.[1] It was reported that Huntsman will be nominated by President Barack Obama to serve as United States Ambassador to China on Friday, May 15, 2009.[2] It is anticipated that a press conference will be held to make the official announcement on Saturday, May 16, 2009. [3] Huntsman is a member of The Church of Jesus Christ of the Latter-day Saints.

He served an LDS mission in Taiwan and speaks fluent Standard Mandarin Chinese.

Huntsman’s name has appeared on some lists of potential Republican nominees for the 2012 presidential election,[9] and John McCain has gone so far as to mention his name as a potential candidate as well.[10]

[From Jon Huntsman, Jr. – Wikipedia, the free encyclopedia]

Chinese boats harassed U.S. ship, officials say – CNN.com

China has started to claim waters in the Yellow Sea as part of China’s Economic Zone. Apparently, to assert control over this area, China is either encouraging or permitting civilian vessels – fishing ships to harass US ships in this area.

The USN will have to begin sending armed escorts along with these civilian ships to discourage the harassment.

Question: How does the USA deal with Russia in Int’l waters equal distance from Russia’s coast line and how does Russia respond?

My suspicion is that the USN doesn’t need to be so close to Chinese waters, and that there are some diplomatic issues that the two countries need to discuss candidly and come to a mutually beneficial understanding. Heck, wouldn’t the USA save money by letting China be responsible for patrols in this region? Or, let Japan be responsible…

WASHINGTON (CNN) — Two Chinese fishing vessels came “dangerously close” to a U.S. military ship in the Yellow Sea off the coast of China last week — the fifth such incident in the past few months, two U.S. officials told CNN Tuesday.

The USNS Victorious is an unarmed ocean surveillance ship operated by a civilian crew.

After the Impeccable incidents, the U.S. Navy provided armed warships to escort some USNS ships in the region, but as one of the officials said, “it’s international waters, we should not have to do that.”

The Chinese claim much of those waters as an economic zone over which they have sole authority.

[From Chinese boats harassed U.S. ship, officials say – CNN.com]

What US tech companies can learn from China and India – May. 5, 2009

It’s a little funny to see an article like this. Just outsource everything… just focus on strategy and marketing. But look at what companies in the west are successful right now, in spite of the economic downturn. Apple comes to mind. Does Apple outsource everything? No – Apple controls and manages the entire customer experience. Assembly and production are outsourced to Foxconn, but Apple still keeps a close eye on the process to manage quality.

How to be profitable? Just need to be innovative. You need to create things that people are willing to pay you for.

Is there any evidence that suggests with a 1:1 exchange rate between the USD and CNY that the Chinese way of manufacturing would be competitive with the American one? Or more importantly, man-hour per man-hour does anyone believe that Chinese manufacturing can compete with manufacturing in Japan or Germany?

Schooled by China and India
What US tech companies can learn about innovation from abroad. Hint: it isn’t just about cheap labor.

NEW YORK (Fortune) — It would be a groundbreaking deal if consummated: According to press reports, telephone operator Sprint is in serious discussions with Telefon AB L.M. Ericsson to outsource management of its wireless network to the Swedish equipment maker. If finalized, the arrangement would make Sprint (S, Fortune 500) the first major U.S. wireless operator to cede total maintenance of its network to a third party consultant.

But in parts of Asia, outsourcing whole swaths of a tech business is old hat. India’s leading wireless operator, Bharti Airtel, for example, does little more than set strategy and handle marketing and sales of phones and service. Contractors, including Ericsson (ERIC) and IBM (IBM, Fortune 500), take care of running and upgrading the actual phone network, operating call centers and other day-to-day operations.

Global consultant John Hagel expects to see more U.S. companies plucking ideas from their international counterparts. Hagel, co-chairman of Deloitte Consulting’s Center for Edge Innovation, says Asian companies have started to implement some innovative management ideas that could resonate in the United States. And while many of these ideas on the surface seem like cost-cutting initiatives, Hagel says they also give tech companies flexibility and leverage, two things that benefit companies in good times and bad. “Chinese and Indian entrepreneurs understand that the only way to get scale is to be very modular in terms of how you define activities,” Hagel says.

[From What US tech companies can learn from China and India – May. 5, 2009 ]

Squanderville vs Thriftville…

5 years ago (Nov 2003) Buffett wrote a great article in FORTUNE that helps simplify the macroeconomic implications of a trade deficit. This device is the analogy of two islands: Thriftville and Squanderville…

We were taught in Economics 101 that countries could not for long sustain large, ever-growing trade deficits. At a point, so it was claimed, the spree of the consumption-happy nation would be braked by currency-rate adjustments and by the unwillingness of creditor countries to accept an endless flow of IOUs from the big spenders. And that’s the way it has indeed worked for the rest of the world, as we can see by the abrupt shutoffs of credit that many profligate nations have suffered in recent decades.

The U.S., however, enjoys special status. In effect, we can behave today as we wish because our past financial behavior was so exemplary–and because we are so rich. Neither our capacity nor our intention to pay is questioned, and we continue to have a mountain of desirable assets to trade for consumables. In other words, our national credit card allows us to charge truly breathtaking amounts. But that card’s credit line is not limitless.

Read Buffett’s original article.

Buffett even goes so far as to suggest a very creative solution – the creation of Import Credits that are issued to exporters based on the value of goods they sell abroad.

Seeking Alpha had a brief article this evening that pointed to Buffett’s original piece…

Interesting Map: American Politics. Land vs/ Population


This was posted on NPR’s Science Friday…

Considering that the elections on the USA are typically something like 52% to 48% (that is, very rarely more than a 10-point-spread) it made me think more deeply into politics.

Consolation: political parties in america are not based on an underlying principle of conservation of the status-quo vs capitalism vs communism. Rather, political parties are closely akin to coalitions.

Reasoning: parties are fueled by the support of special interest groups. Parties divide up the special interest groups issue by issue, accounting for the base of the party, and then seek out new issues based on the desire to expand their party membership.

Interesting to note that based on demographic shifts in the USA, the republican party may have put itself on the wrong end of the growth trend.

Is it just the philosopher in me that believes the “party” should be based on a single underlying philosophy about what creates the optimal system of american government, and that all positions could be logically derived from this PoV? Perhaps I’m too simple minded in believing that there should be a theoretical underpinning to the management of what is ultimately interest/benefit. More importantly, perhaps we could never even arrive at agreed definitions within a party on what is “optimal”…

Libertarianism does seem to be somewhat in line with this logic: The government that governs best is the government that governs least.

Best movie speaches (USA Movies)

This was a great article. My list would be a little bit different, but I mostly agree… I would add some speeches from Boiler Room, Training Day and most certainly Fight Club to the list, and probably remove some of the older films as I haven’t seen them — maybe afterward I’ll have a change of mind 😉

2. Jack Nicholson, A Few Good Men (1992): You can’t handle the truth! Son, we live in a world that has walls, and those walls have to be guarded by men with guns. Who’s gonna do it? You? You, lieutenant Weinberg? I have a greater responsibility than you can possibly fathom. You weep for Santiago, and you curse the Marines. You have that luxury. You have the luxury of not knowing what I know – that Santiago’s death, while tragic, probably saved lives; and my existence, while grotesque and incomprehensible to you, saves lives.

4. Samuel L Jackson, Pulp Fiction (1994): The path of the righteous man is beset on all sides by the inequities of the selfish and the tyranny of evil men. Blessed is he who, in the name of charity and good will, shepherds the weak through the valley of darkness, for he is truly his brother’s keeper and the finder of lost children. And I will strike down upon thee with great vengeance and furious anger those who attempt to poison and destroy my brothers. And you will know my name is the Lord when I lay my vengeance upon you.

5. Michael Douglas, Wall Street (1987): The point is, ladies and gentleman, is that greed – for lack of a better word – is good. Greed is right. Greed works. Greed clarifies, cuts through and captures the essence of the evolutionary spirit. Greed, in all of its forms – greed for life, for money, for love, knowledge – has marked the upward surge of mankind. And Greed – you mark my words – will not only save Teldar Paper but that other malfunctioning corporation called the USA.

10. Mel Gibson, Braveheart (1995): You have come to fight as free men, and free men you are. What will you do with that freedom? Will you fight? Aye, fight and you may die, run and you’ll live. At least a while. And dying in your beds many years from now, would you be willing to trade all the days from this day to that for one chance, just one chance to come back here and tell our enemies that they may take our lives, but they’ll never take our freedom!

See the complete list:

http://news.bbc.co.uk/2/hi/entertainment/3362603.stm

嘲笑世界最强大国家的近视外交。。。

今天,美国的确还是世界上最强大的国家。没有其国家或联合能“单方面”(unilaterally)宣战,等等。可惜真的少数美国公民花什么时间在了解美国以外的事。。。这个问题不是新的,也不单是美国的问题,就是美国权利那么大,所以责任也更大。如果美国要继续保持超级大国身份,必须让人民更国际化。

有一些地图嘲笑普遍美国人民的地理概念。同时,这群体的税费睡支持情报局和军部干扰射界各地。

US_World.jpg america.gif americanview.gif world-according-to-regan.gif reaganposter.jpg

American’s and their Real-Estate market…

Interesting piece in the Economist: American housing – Map of misery. Can’t say I care too much, but it does define the relationships between rents and mortgages in more eloquent economic terms that I have 😉

A better measure of housing fundamentals is the relationship between house prices and rents. This is a sort of price/earnings ratio for the housing market: the price of a house reflects the discounted value of future ownership, either as rental income or as rent saved by an owner who lives in the house.

—Chinese Version—

衡量关于房地产的基础经济情况:房价和租金的关系。你可以理解这个比例有点像股票的市盈率:一套房子所有权的价格表示贴现值的未来所有权。这个所有权代表房子可以赚的租金或者这个房东可以节约的房租。

当然,你还要考虑:

-利息的比例
-通货膨胀的比例
-其他的因素

但是可以用这个比例来判断这段时间是否适合买房。

And in case you were curious about that map…

Map.gif

UPDATED: 2008/05/15 – Added Chinese Translation and Considerations…